Full Judgment
Sankarasubban, J.
The above case has been referred to us by the Income Tax Appellate Tribunal, Cochin Bench on a reference by the assessee. The assessee is a partner in the Firm of M/s. Hindustan Engg. Co., Calicut. A reconstitution deed of the partnership was executed on 25-5-1982. That deed shows that there are three partners, K. Govindan, K.P. Prabhakaran and K.G. Krishnakumar. It is further seen that KG. Manojkumar was a minor and he was admitted to the benefit of the partnership. Capital of the Firm was Rs. 25,000 provided by the three partners and the minor in proportion of Rs. 10,000, Rs. 5,000 and Rs. 5,000 respectively. Clause 7 of the deed says that the first partner will be entitled to a profit of 5096 and a liability to the extent of 62.5%, second partner is entitled to a profit of 25% and a liability of 25%, third partner is entitled to a profit of 12.5% and a liability of 12.5% and the minor K.G. Manojkumar is entitled to a profit of 12.5%.
2. By agreement dated 1-4-1984, clause (7) of the partnership deed was altered. By the alteration, the assessee first partners profit was reduced from 5096 to 30%. The profit of the second partner K.P. Prabhakaran was reduced from 25% to 10%. The profit of the third partner and the minor was increased to 30%. The assessing officer took the view that on the basis of the reconstitution of the Firm, the assessee surrendered 20% of the share in the firm in favour of the two partners, which included the minor. It was also found that there was a gift by the assessee and that was held to be a gift assessable under the Gift Tax Act. The matter was taken in appeal by the assessee. The Appellate Authority rejected the contentions. An appeal was filed before the Tribunal. The Tribunal also held that there was a transfer and it was a gift under the Gift Tax Act. It is thereafter that the following questions of law have been referred to us. The questions of law referred to us are as follows :
'1. Whether on facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the applicant was liable to gift-tax on surrender of his share on a reconstitution of the firm?
2. Whether there were materials for the-Tribunal to come to the conclusion that the alleged gift made by the applicant was without consideration in money or moneys worth within the meaning of the Gift Tax Act?'
3. Learned counsel for the assessee contended that there was no gift. There was only a reduction in the share of profit of the assessee and that does not amount to a gift. On the other hand, learned counsel for the revenue submitted that there was no consideration for the transfer and hence, it is a gift.
4. In CGT v. D. C Shah : [2001]249ITR518(SC) the Supreme Court held as follows : 'That the share or partner in a firm is decreased and that of another partner correspondingly increased does not lead to the inference that the former had gifted the difference to the latter. The profit-sharing ratio in a firm cart vary for a number of reasons, among them the ability of the partners to devote time to the business of the firm. The gift of a part of a partners share to another has to be established by relevant evidence. The onus of doing this on the revenue'. Another case cited was Sree Narayana Chandrika Trust v. CGT : [2003]261ITR279(SC) . In that case, the Supreme Court held thus :
'The facts found in the present case are that the incoming partner (M.U. Indira) had contributed Rs. 25,000 towards her share of the capital. The value of her set-vices or usefulness to the firm as partner has not been disputed by the revenue authorities. As pointed out by this court in CGT v. D.C. Shah : [2001]249ITR518(SC) , the mere fact that upon reconstitution of the firm the share of one partner decreased and that of another increased cannot lead to the inference that the former had gifted the difference to the incoming partner. There is no other material placed on record by the revenue to show that, in the facts and circumstances of the case, particularly taking into consideration the obligations of all the partners in the partnership deed dated October 1982, there was inadequate consideration for the reallocation of 12 per cent of the share in favour of the incoming partner. In our view, the contribution of Rs. 25,000 towards the capital together with the obligations undertaken of sincerely and faithfully carrying on the business for the corm-non advantage of the firm was adequate consideration for reallocating the share of the profits and giving 12 per cent of the shares in favour of the incoming partner....' (p. 285)
5. Learned counsel for the revenue submitted that in so far as the decision in Sree Narayana Chandrika Trusts case (supra) is concerned, the Supreme Court has taken into consideration that facts that an amount of Rs. 25,000 was contributed by the incoming partner. He tried to distinguish the present case on the ground that there has been no fresh contribution. on the other hand, learned counsel for the assessee submitted that it is not necessary for the new partner to contribute. According to him, the present case falls within the decision of the Supreme Court in D.C. Shahs case (supra).
6. After giving our anxious consideration, we find that so far as the present case is concerned, it cannot be said that there is a gift. It is not a reconstitution of a Firm. By the amendment, there has been a reallocation of the profits. There has been a decrease in the percentage of profit of the assessee while there has been an increase in the profits of two partners. Excepting this, there is nothing to show that there has been a gift as stated in the D. C Shahs case (supra). The revenue has not proved any fact to show that there is a gift.
7. In the above view of the matter, we are of the view that there is no gift. Hence, we answer question No. 1 in the negative and against the department. Question No. 2 is also answered in the negative and against the department.
I.T.Rs. are disposed of as above.